bodyType

customContents

entityId

entityUuid

articlePageQuery

filter

article

articleBaseAdvertisingInfoArticle

articleListArticle

articleSeoArticle

hooksArticleAcknowledgementGateOverlayArticle

hooksTrackPageViewArticle

hooksContentInterestArticle

articleLinkingDataContent

hooksAmpRedirectArticle

articleSchemaContent

liveArticle

advertZone

sentiment

contentLock

topics

types

sections

paywallTypes

createdDate

publishedDate

urlAlias

moreOnThisArticles

sponsorType

commentCount

authorLocations

authors

corrections

displaySlideShow

multimediaEmbed

printHeadline

seriesContainer

articleSpeeches

socialHeadline

headline

images

flag

firstTopic

glossary

flattenTypeIds

image

relatedLinks

relatedNewsletters

__typename

sponsor

pdfFiles

seriesReverseOrder

series

disableOffPlatformContent

published

updatedDate

summary

subHeadline

body

keywords

readingTime

customTimezone

liveContents

SCMP Reporter

FINANCIAL Secretary Sir Hamish Macleod's determination to stem tax avoidance through service-company arrangements has scared many professionals who worry that over-legislation may kill legitimate users.

  His strong statement that ''I am not in the business of tolerating tax bonanzas. I consider that the time has come to legislate'' is worrying to those who use the mechanism to claim their fair share of employee benefits.

   Three groups are particularly using the service-company arrangement as a means of claiming their benefits: commission earners, professionals who are not allowed to form limited companies, and employees whose terms of employment do not enable them to enjoy tax benefits.

  Under Inland Revenue Ordinance section 9, certain employee benefits provided by the employers can offer tax advantages.

   For instance, housing allowance is not considered fully as income and is only taxable on 10 per cent of the employee's assessable income.

   Other tax-free benefits include leave passage and medical allowance.

  However, there are employers who want to reduce their administrative costs by cashing in the allowances for the employees and giving them a lump sum instead.

  Since the lump sum is considered as income received by the employees, it is subject to full tax.

  ''In order to claim back these legitimate benefits bestowed upon them by the existing tax regime, these employees will form a service company, which is only a shell company, and set up a service contract between the employer's company and the service company,'' said Jennifer Wong, associate of Peat Marwick.

  The legal employer would then be changed from the original company to the service company.

   The original company would pay service fees to the service company which would in turn give them out as salaries to the employee who sets up and controls the service company.

  As the Financial Secretary said in his Budget speech, what sometimes happened was that ''a substantial of reduction in the amount of tax which would otherwise be payable can then be obtained through the service company providing the individual with generous employee benefits''.

   The employee may abuse this mechanism by properly structuring the items on the shell company's accounts and claim tax benefits which he or she is not entitled to under the original company.

  An extreme form of such abuse, which is tantamount to tax evasion, is setting up the shell or service company offshore and booking its profit there without reporting to the Inland Revenue Department at all.

  ''It is difficult to track these companies down because they have no business registration in Hong Kong. The Inland Revenue Department does not have the resources to check,'' Ms Wong said.

  That becomes tax evasion because under existing regulations any business that is carried out in Hong Kong and derives its income source from Hong Kong is subject to income tax.

  Still there are groups which are properly using the mechanism as a way to make full use of their tax benefits, such as commission earners and certain professionals.

  ''Since their income fluctuates, largely dependent on the amount of commission, employers have no guarantee if the employees can earn as much every month. So they are reluctant to provide fixed amount of housing allowance every month,'' Ms Wong said.

  Besides, there are professions such as accountancy which are not allowed to form limited companies.

   They can only come together as partnerships and their remuneration from the partnership company can only be in the form of dividends and not salaries.

  ''They are then denied the general tax benefits that others enjoy. So by setting up a service company, they are getting the benefits that are within the existing tax parameters,'' she said.

   But the possibility to abuse this mechanism ''involves the payment of inflated management fees by a firm to a service company, which is controlled by the firm's proprietor or its partners. The service company employs the proprietor or partners and uses the fees to pay them 'employee benefits','' said Sir Hamish.

  By bringing in new legislation to tackle the abuse cases, genuine users may be caught in the net as well.

  Tim Lui, chairman of taxation committee of the Hong Kong Society of Accountants, said there was no need for any legislation in the aspect of personal service company.

      He said the society would follow the issue and seek consultation with the Government about it.



Honest employees fear broad net